Looking Ahead to the Future of Flood Insurance
Produced By Phil Reinking, 2nd Vice President, LSPD | May 29, 2019
Lenders, it’s important to understand flood risk exposure, regulatory compliance, and insurance, so that your institution can be proactive in planning for changes ahead in the industry. Historically, flood coverage was deemed too high a risk by private insurers, so it was excluded from a traditional homeowner policy. In response, the National Flood Insurance Program (NFIP), a government program founded in 1968, was created to provide a flood insurance option to buyers. However, over its 50 year history the program has faced challenges of rising losses and the sustainability of managing those losses.
Flooding is the most common natural disaster that occurs in the United States. In fact, in the last 3 years with records available (2015-2017), property damage costs due to flooding rose over 2,500% ($2.8 billion reported in 2015 to $60.58 billion in 2017).1 And while it’s notable to point out that 2017 was a particularly heavy year for hurricanes (ie. Hurricane Harvey and Irma), it’s important to recognize that flooding and flood insurance policy claims are not limited to coastal areas, but impact consumers and lenders nationwide. FEMA’s flood map identifies all 50 states (98% of all US counties) have been impacted by a flooding or a flash flood event in recent years.2 Escalating costs are a growing concern as 7 of the top 10 significant flood events measured by NFIP payouts have occurred in the last 10 years (2008-Present), with average payouts exceeding $30,000.2 The NFIP currently reports a $20 billion deficit which comes after a government bailout in 2017 that cancelled an additional $16 billion.3
Where is Flood Insurance Now?
Hurricane Harvey in 2017 was a major event that caused unprecedented flooding in Texas that lead to $128 billion in damage.1 This is an example of the NFIP’s escalating challenge of providing flood insurance and handling claims as more people continue to move to coastal areas and flooding incidents have a larger area impact.
Currently, the NFIP faces affordability and longevity concerns, so Congress operates the program on short-term extensions which can lead to temporary lapses of NFIP coverage. Along with that, new legislation impacts ongoing compliance that is federally regulated. Various legislative bills have passed over the NFIP’s 50-year history in an attempt to strengthen the program and to encourage a private flood insurance market.5 The Biggert-Waters Insurance Reform Act of 2012 was the last major piece of legislation implementing change for the NFIP with upcoming provisions further defining that lenders also accept private flood insurance that meets guidelines for a standard flood insurance policy.5 These changes come from long-standing concerns over the NFIP’s solvency as a solution for flood insurance coverage, and steps are therefore being taken to nurture a private market.
Stay Informed: Sign-up for information on compliance, collateral risk, and upcoming flood provision changes.
Where is Flood Insurance Going?
Congressional efforts are looking beyond the NFIP in its current state as it becomes clear that the current program is not sustainable long term from a budgetary and actuarial standpoint. The goal of keeping flood insurance affordable to property owners, but also keeping the program viable is a difficult balance.
Texas and Florida are leading the effort to improve the program as they’ve both been hit by large hurricanes in recent years—with Florida passing state legislation that encourages private insurers to provide flood policies.5 With the push to nurture and develop a sustainable, private market there’s an emphasis to further define and regulate the definition of acceptable private flood insurance coverage. Additionally, switching from a reactive model of fixing what was lost to a more proactive model of reducing future flood exposure is an important NFIP pursuit in curbing future repeat flood losses.
What is the Impact to Financial Institutions?
Financial institutions need to be proactive in their policies and procedures in order to best handle and anticipate the changing industry. In order to prepare, leaders should start having discussions about the following:
1. Establish a new set of systems. The types of flood insurance that will be accepted is diversifying and changing, so it’s important to have thorough processes and procedures for accepting and monitoring flood insurance with documentation that demonstrates the consistent execution of those procedures.
2. Review vendor options. Potential vendors bring specific value to a process that may ultimately save your institution time and money. As flood insurance evolves and the complexity of regulations grow, it would be a benefit to review available options that will assist in effectively managing the risk.
3. Stay on top of compliance. Regulatory updates and changes will impact your process and system. Be sure you have communication lines open that are monitoring and alerting you to potential changes to flood insurance coverage, and have a plan in place on how to best accommodate those changes.
Click here to download a checklist to help discern if a policy meets the definition of 'private flood insurance.'
About Allied Solutions
Allied Solutions, LLC is one of the largest providers of insurance, lending, and marketing products to financial institutions in the US. Allied Solutions uses technology based products and services customized to meet the needs of 4,000 clients along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains over 15 regional offices and service centers around the country and is a subsidiary of Securian Financial Group, Inc.
1 Natural Hazard Statistics. US National Weather Service. 2015-2017.
2 Spotlight on: Flood insurance. Insurance Information Institute. March 2019: https://www.iii.org/article/spotlight-on-flood-insurance
3 National Flood Insurance Program. US Government Accountability Office: https://www.gao.gov/highrisk/national_flood_insurance/why_did_study#t=0
4 National Flood Insurance Prorgam. National Association of Insurance Commissioners (NAIC). January 2019.
5 Flood Compliance: Exploring the Depths. ABA Risk and Compliance. June 2018.
Content in the blog posts are the opinion and views of the writer, and don't necessarily reflect the opinions or views of Allied Solutions.